MC12, WTO crisis and reform

Perspectives: The world trading system is no longer subject to universally agreed rules

The last-minute postponement of the WTO Ministerial Conference late last week, nominally the result of a change to Swiss COVID-19 related travel rules, was unfortunate. But it is also illustrative of an organisation in decline – and nobody can realistically be expected to come to the rescue.

The shock of the cancellation of the WTO Ministerial Conference came from its suddenness and closeness to the scheduled start date. Within a few hours it seemed we had all discovered a new COVID-19 variant, Switzerland closed its borders to some countries, and inevitably a long-awaited meeting could no longer happen.

Initial reactions involved disappointment mixed with some relief. The matter was seen as an opportunity missed – or postponed until next year – to make progress or conclude discussions in areas such as e-commerce or services domestic regulation. However it was also seen as a potential way of averting damaging potential failure to reach new agreements on COVID-19 related intellectual property rule waivers or fisheries subsidies.

Some more profound thoughts emerge with a few days’ reflection.

There was and still is no real sign of a deal on IP, and fisheries subsidies remains a niche, if important, issue.

More importantly, there remains no evident sign of progress towards resolution of the impasse over the appellate body. Few insiders realistically expect a global deal on an emerging issue such as carbon pricing in the coming years.

Overall, the WTO failed to hold a ministerial meeting and outside of the world of trade specialists nobody cared very much.

Together with the increasing prevalence of not-obviously WTO-compliant deals centred on the US, and including the EU, China, and Japan, we have to judge that the worst is coming to pass, that the organisation has lost its place in the global power hierarchy.

Accepting these emerging new realities should in turn bring forward a different set of questions.

These are a higher level than the technical details of fisheries subsidies. This is now about dealing instead with the implications, in particular an increased diversity of trade rules, whether anything can – or should – be done to change the situation.

A diversity of trade rules and settings

There were always trade rules outside of the WTO such as free trade or Mutual Recognition Agreements and other non WTO multi-country agreements. While there was always some element of controversy about their consistency with WTO rules and ethos, in general they stuck within known WTO principles and could otherwise be challenged through the dispute process.

All parts of that equation have now changed.

Most obviously there is no appellate body, so in effect no basis for settling the question of consistency with WTO rules. Agreements such as the 2020 US-China Phase One and the recent US-EU steel and aluminium dal appear to have little respect for core WTO tenets such as most-favoured nation and the need for FTAs to cover ‘substantially all trade’.  Meanwhile India and South Africa are, if anything, stepping up their general arguments that plurilateral agreements in the WTO are incompatible.

There is a positive side to the current situation, which is that rarely have there been so many initiatives trying to build new rules in different areas.

From the planned e-commerce plurilateral agreement to digital economy agreements or DEPAs in the Asia-Pacific, a WTO-plurilateral on services domestic regulation to carbon border adjustment, the trade world is alive with ideas and people and countries wanting to make progress.

It would be a mistake to see the current situation as entirely bad.

However, it does have troubling implications.

Not everyone wins from diversifying rules, all may ultimately lose

The rules governing modern trade are voluminous, they are often individually complex, and collectively extremely complex to navigate.

They consist of differing domestic regulations on almost every subject of trade, binding international treaties such as FTAs, and numerous voluntary and private standards of varying importance.

There is no doubt that such a system disadvantages smaller companies and countries with fewer resources to navigate it successfully.

By contrast, the larger enterprises that increasingly dominate global supply chains are able to afford the specialists to influence and operate according to the regulations. They can also require suppliers to meet their own ways of doing things.

Larger countries and trading blocs such as the EU can similarly summon the resources to shape their trading environments.

Such a system is however increasingly economically suboptimal. More competitive suppliers may well be excluded as incumbents effectively control their regulatory space. Meanwhile countries are forced to accept multiple rule-sets at higher cost, in a tacit form of protectionism.

Ultimately, we head towards a less vibrant global economy.

This will not be the competing tariff rises of the 1930s, but an equally damaging, if slower descent into a world of what is effectively managed trade.

Limited will to change direction

While the issues with global trade rules undermine WTO foundations, there seems to be very little discussion of this trend.

The lack of discussion could come from a belief that the fundamentals are basically strong, or represent a denial of current difficulties, or perhaps, worst of all, simply be an acceptance of the situation, along with a realisation that the politics of the USA in particular won’t allow for anything different.

One might hope that the Ottawa Group would be well placed to think of new approaches, or at least some of the academic or other WTO specialists. But the suggestions this group of WTO members are making are more about technical fixes than fundamental, political issues.

Realistically then it seems that nobody is going to come to the rescue of the WTO. This year we have seen an energetic new director-general take the helms of the secretariat in Geneva and a new United States administration apparently better disposed towards the institution than its predecessor.

But there is little prospect of a significant change of direction.

The world trading system is no longer subject to any universally agreed rules. The Swiss government can prevent a ministerial meeting from happening.  That’s the new reality we all have to work with.

 

 David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.

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